Dubai Sovereign Bond: "Pay to Play"

An article in the FT today reports that bankers were told that lead underwriters on Dubai's recent US$1.25 billion sovereign bond were told that in order to be considered they needed to make loans to the Emirate.  Supposedly a two-year loan for some US$300 million priced at Libor +300 bps.

A couple of observations.

First, this is a pretty standard request, particularly from a client having a bit of a problem.  Just as the good banker is taught to seek to increase his "share of a customer's wallet" in good times, borrowers especially those currently out of favor in the market look for their bankers to be understanding in more difficult times.  In both cases there's a lot of talk about the importance of relationships.  How strong they are.  Sentiments said with no doubt more sincerity than the average politician's promise.  But just as meaningful for that.

Second, Dubai's Sovereign Bond was "priced to place".   Dubai could not afford to have this transaction fail. With a bond, a low price means the interest rate was set higher than it needed to be.   Pretty much the same rationale as IPO pricing.  Under price the security by a bit so that the offer is successful.  And then  as the share rises in initial trading, you've got a good story for the company and the investors.    

I've seen estimates that Dubai's pricing may have been as much as 0.75% to 1.0% higher than required.  The underwriters who "sat" on a substantial portion of their allocations may not too far in the future have large capital gains - though probably not until after issuance of the DEWA bond.  If they've placed it with clients,  as some will have, then they will derive some relationship benefits there and can use those to secure additional business from those clients.    Just as the investment firm that can allocate IPOs to its customers gets something back.

For HSBC and Standard Chartered with major domestic operations in the UAE, being seen as a good friend is a useful thing.  If indeed SC's threat to move its corporate headquarters to the more tax and regulation friendly shores of Dubai is more than mere posturing, another good reason.

Finally, there's probably also a very hard headed calculation here - that it's going to be some time before Dubai regains full market access.  Amounts are likely to remain limited  and increasing only slowly.  Pricing will probably improve even slower.  As the thinking goes, there are opportunities for profit here.

And of course, there is one other factor in play:  banker and investor ADD.

Do bankers have short memories?

Excuse me, could you repeat that, I've forgotten what you asked. 

Norton Rose Survey on Middle East Lending

You may have seen some references to this survey in press articles.

The Middle East survey, which really seems to be focused primarily on the UAE and the GCC, is part of a larger NR global survey "Global Financial Recovery:  A Matter of Perspective".  The ME Section is pages 58 through 64.

As with all exercises of this sort, it's utility is a function of the selection of the group asked to participate and then those who actually did.

MEED MENA Real Estate Report

حقل الأحلام الكويت

If you build it, he may not come after all.

 

AlQabas has a summary of a recent Middle East Economic Digest ("MEED") report.

Pretty much the report can be summarized in the table below.

CITY	Median Office Rent Per Square Meter	Average Commercial Vacancy	Median Residential Monthly Rent
Abu Dhabi	$51	3%	$3,500
Amman	$16	10%	$   800
Cairo	$39	0%	$   800
Doha	$50	20%	$3,000
Dubai	$38	38%	$1,900
Jeddah	$25	10%	$1,000
Kuwait	$42	40%	$2,000
Manama	$24	10%	$2,000
Muscat	$23	5%	$1,110
Riyadh	$33	20%	$1,500

 

As mentioned in the article, it's important to remember that these are median rates for a city. There may be more than one market in a city. So, for example, Shaykh Zayed Road may be booming in Dubai with strong occupancy and rental rates, while other areas are really depressed.

On that latter score, I'd invite my Arabic reading audience to comment if I've translated the terms معدل and متوسط correctly. I'm reading these to be Arabic for the statistical terms "mean" and "median" respectively.

And finally anyone who'd care to comment about the rental rates.

Presssure on Rent Levels in Bahrain -If You Build It, They Might Not Come

The Gulf Daily News reports that rentals have fallen across the board in the retail, residential, office and industrial sectors.

Martin Cooper of DTZ Middle East is quoted as saying:

"The region has woken up to the fact to only give the people what they can afford and not recklessly invest in projects they cannot afford or those which are of no use," he told the GDN.

Often one wakes from a nightmare only to fall back asleep again.

Insights into the GCC Markets from Markaz’s “Golden Portfolio” Report

In April 2008, Markaz issued its first report on the "Golden Portfolio" – the various stocks held by GCC government owned enterprises ("GOEs"). On 7 September it updated its analysis with data as of 5 July 2010.

The report tracks the holdings of 51 GCC GOEs in GCC stock markets.

The following two charts summarize the macro snapshot (original chart on page 2 of September 2010 report).

First, the number of companies in which investments are held.

COUNTRY	NUMBER OF GOEs	NUMBER OF COMPANIES HELD	TOTAL NUMBER OF COMPANIES	PERCENT
Saudi Arabia	10	47	140	33.6%
UAE	10	29	110	26.4%
Qatar	8	18	45	40.0%
Kuwait	10	42	194	21.6%
Bahrain	9	20	44	45.5%
Oman	14	23	127	18.1%
TOTAL	51	179	660	27.1%

Second, the value held expressed in US$ billions.

COUNTRY	VALUE OF GOE INVESTMENTS	TOTAL VALUE OF MARKET	PERCENT
Saudi Arabia	$109.7	$314.6	35%
UAE	$ 28.3	$ 97.2	29%
Qatar	$ 26.0	$ 97.7	27%
Kuwait	$ 11.7	$ 90.9	13%
Bahrain	$ 3.5	$ 16.4	21%
Oman	$ 2.7	$ 16.7	16%
TOTAL	$182.0	$633.5	29%

This data gives an idea of the relative government presence in local markets. It also shows the relative sizes of markets.

But if you drill deeper into the information on the country tables, what you learn is that: 

1. In Saudi Arabia, 5 companies held by GOEs account for 38% of total market cap. One company SABIC over 21%. 
2. In the UAE, 5 companies held by GOEs for roughly 42% of market cap. One company, Etisalat, almost 23%. 
3. In Qatar, 7 companies held by GOEs for 47% of market cap. One company, Industries Qatar, for 15%. Another Qatar National Bank for another 15%. 
4. In Kuwait, 8 companies for almost 44%. (If you're wondering, the group does not include NBK which is a market heavy weight in its own right). With Zain at 19%. 
5. In Oman, 5 companies for 35%. One, Omantel, for 14%. 
6. In Bahrain, 4 companies for a whopping 69% of the market. One, Batelco, for just short of 20%.
   

By contrast Exxon Mobil (the largest single stock) represents roughly 2.6% of the NYSE's US$11.7 trillion in July 2010 market value. HSBC just short of 7% of the LSE's US$2.7 trillion of value.

"So what?" you might ask.

1. Modern portfolio theory ("MPT"): Where a handful of companies dominate the market, market risk may be swamped by specific risk. What sense does it make to use the tools of MPT, e.g., CAPM, betas, etc in this context? 
2. Conflict of Interest: But there's more. Where the government has significant holdings in companies, even if this shareholding is less than a majority, it may exercise effective control. In such situations, companies may be managed with national strategic goals more important than maximizing shareholder wealth. 
3. Liquidity: Government strategic holdings reduce free float. The consequence is reduced trading which limits price discovery, increased share volatility (small transaction "tickets" have a disproportionate effect on price) and limited liquidity (the ability to exit one's position).
   

The implications are pretty clear but I think often not really thought through by market participants. And so probably not fully reflected in prices.

Dubai World: The Impact of the Fixed Interest Rate on Secondary Debt Prices

FOR SALE 

 

Great Price.  One Owner Only! 
Carefully Underwritten and Maintained

Asa Fitch over at The National has a report on secondary loan sales of DW debt.  As per his report only US$25 million has been sold so far by an unnamed Asian bank at US$0.55 of par.

Traders are quoted as saying there is a disconnect between the bid and offer prices with sellers looking for modest discounts and buyers thinking more in the range of 30 to 60% discounts.  That's an extremely wide range - which indicates the lack of real demand.  Also it may be reflective of differing discounts for the five-year and eight-year paper.

For a potential buyer there are two key risk issues with a purchase:

1. Repayment Risk - Will DW settle its debt in full?  So there is a premium added to the "risk free" yield to compensate for this risk.
2. Interest Rate Risk -  DW's debt is at a fixed not floating interest rate.  The price of financial instruments with fixed interest rates moves inversely to the current market level of interest rates.   If you think about that it makes perfect sense.  If the market if offering to sell you a new bond with a fixed 5% coupon, why would you pay the same amount for an equivalent credit risk bond with a fixed 2% coupon and the same repayment profile? You'd be willing to buy the 2% bond only if its price were less than par.  Sufficiently less so that you earned 5% on  the bond. The extra bit of yeild coming from capital appreciation.  This price risk exposure is measured by duration and convexity. Duration estimates the price change using a linear approximation of the price change function (equation).  Since the actual function is not linear, a second approximation, convexity, (technically the second derivative) is used to correct the first. Bond sensitivity to interest rates can work both ways.  If market interest rate levels decline, then one's bond is worth more.  That is, reversing the example above, one has the 5% coupon bond in the 2% market coupon environment.  As noted above in the original example, if market interest rates increase, one's bond is worth less.  Since DW's bonds are at below market rates and since market rates are at historic lows, there is little upside potential.  Any buyer will be focused on pricing the downside risk into it's bid.  Compounding the pricing will be the credit risk element.  Just to complete the discussion, floating rate instruments are less much sensitive.  Their duration is generally equal to the length of the repricing period not a function of maturity.  With, for example, a quarterly interest payment reset one can ignore interest rate risk.

These two factors affect the discount.  The bigger the required yield on the instrument the bigger the discount.

Since I haven't seen much discussion of interest rate risk, and since I think it's an important factor affecting the secondary pricing of DW debt, I'm going to focus on it in this post as you may have guessed from my "succinct" discussion of this topic immediately above.  

This is a structural issue.  As the restructuring was crafted, lenders had two options to reflect the economic value of the debt.  

1. Haircut the debt and get a market or near market rate on the debt. 
2. Maintain the fiction that the debt was worth par and take a below market interest rate.

Why did they choose the structure they did?

Some potential explanatory factors:

1. The importance of cashflow to DW.   DW is cash strapped.  A higher interest rate will impact them more now than reduced principal repayments which in traditional restructuring style are going to be backended.  DW's overriding goal is to delay as long as possible the sale of assets, hoping that an economic recovery will allow them to realise more value.  Or that  a refinance will become possible.  Particularly important because a lot of these were purchased at the top of the market with more than modest levels of leverage. 
2. The wise lenders in the steering group who have the remarkable accomplishment of being responsible for 60% of DW's debt (Another great moment in banking!) are probably not going to be selling because the pain would be too great.  It's much easier to absorb say an US$11 million loss on one's US$25 million stake than say a US$2+ billion loss.  So they have no burning incentive to  create a more seller friendly structure.  They're holding at cost not marking to market.  Assuming DW performs under the restructuring, their "haircut" will be the IAS#39 mandated one time present value difference using the new interest rate versus the older higher one.
3. Forgiving principal sets all sorts of dangerous precedents and raises all sorts of dangerous ideas in the minds of borrowers.  
4. Also since interest rates can't go negative, an interest rate reduction has an absolute bound in terms of the haircut.  
5. Additionally, many folks don't understand the concept of present value so an interest rate reduction is not considered as serious as a principal reduction.  You might be surprised (and maybe some of you dismayed) to learn that in many institutions a principal reduction requires a more stringent approval than an interest rate reduction - even when the present value impact is the same.   With the financial press and the average investor the awareness appears to be even lower.

 As usual,  let's begin with the assumptions:

1. A market-demanded discount of 50% of par.   Roughly in the midpoint of the mentioned discount rates.
2. An average 5 year life for the 8 year DW restructured loans.  Since we don't know what the principal repayment schedule is, we have to assume an average life.  I think five years is a good guess. DW's repayments probably mirror the pattern typical for restructurings:  low payments in the first years with the largest in the latter years.  If equal amortization would result in a bit over 4 years average life, then 5 years should be on the safe side. Use of 5 years then sets what I think is a reasonable upper bound to the YTM.  In any case hopefully enough for a directional analysis.  Hint:  I will gladly receive a copy of the  restructuring term sheet if anyone wants to send it to me.  Use the Contact Form to make the initial contact to agree transmission details.
3. A 2% (fixed) coupon.
4. Repayment in full on schedule assumed.

Here are the numerical results.

We can bound the yield to maturity on the 8 year tenor loan between two  points.

Yield to Maturity ("YTM")

1. Assuming a straight bond with a bullet repayment of principal at the end of Year #8, the YTM is roughly 12%.  While interest payment frequency affects the YTM, the difference is minor.  For our directional analysis, I'm therefore going to ignore it.  12% represents the minimum YTM because the restructured loans provide for principal repayments during the life of the loan not just at the end.
2. Using a 5 year average life, the rough YTM is 17%.

Modified Duration

1. For the straight 8 year bond, duration is very roughly 7 times.
2. For the straight 5 year bond, duration is very roughly 4.5 times. Recall that as above we're guesstimating that the average life of the loan as 5 years.
3. What that means is that if  interest rates increase 1% with no change in default risk (credit rating of DW) and no change in credit spreads (the margin demanded for a specific credit grade), then the DW debt will lose roughly 4.5% of its market value. I've chosen to ignore convexity here because it's not likely to be a significant decrease of the duration impact for  the range of likely market interest rate levels.  Since over the next five to eight years, interest rates are more likely to go up than further down, this is a real risk.  A modest 2% hike in interest rates and there is a 9% loss - which will more than outweigh the coupon earnings.
4. Of course, for an investor who intends to hold the bond to maturity, the price loss will be a mark-to-market event and not necessarily a cash flow loss.  Unless of course the investor sells the bond.  However, a fund or a trader will be marking to market and thus performance will be affected.    With a direct impact on such personally important things  for a fund as fees and reputation for the next fund sale. Or for a trader his bonus and perceived trading skills. You can probably easily imagine how these might increase reluctance to increase one's bid, particularly when demand is minuscule in relation to supply.

Other Factors Affecting Demand

1. Secondary Play:  There is no secondary play here.  Often in distress situations, buyers of debt may be motivated by the chance to acquire a company cheaply (buy the debt wipe out the existing shareholders) or other factors.   Emirates Airlines or Emirates NBD are not on offer.   The restructuring is "done and dusted" so there's no negotiating leverage over deal terms.  And one would have to make quite an investment to acquire a blocking vote on the chance there would be a future covenant hiccup that one could take advantage of.    One of our regular commentators, Laocowboy2 mentioned a time-honored sovereign debt settlement mechanism - using the debt as the currency for investing in a new project in the country.  Often with the debt being exchanged at par (not its purchase price) and sometimes at a favorable FX rate which effectively lower the cost of the investment.  Many an savvy investor in Latin American tourism reaped a bonanza return using this framework.  Others who invested in more brick and mortar enterprises less so.  Hint:  An investor's return in such transactions depends more on the creative use of imaginative transfer pricing than one's ability to run a business, though the latter is important.  In any case,  I suspect it is unlikely that Dubai will offer such a program.  The sovereign debt "hole" here is not that deep. Nor the distress that acute at present.
2. Credit Rating Upgrade:  While the "hole" is not that deep, there is still a hole.  Assuming good performance, at some point DW will be upgraded.  However, this is unlikely to happen in the near term.  By the time significant debt is repaid, it may be so close to final maturity that the impact on YTM may be relatively modest. As well, the structural fact that the debt is at a below market fixed rate is going to work against any significant increase in the price.   
3. Credit Spread Compression:  Usually this occurs in times of irrational exuberance.  Judging by the state of the world economy, a near term return to such giddy days is perhaps not a bet a savvy investor would make today.  And again the very low fixed rate is a negative.
4. Prepayment:  It's unlikely that DW is going to prepay the loan in the near term. If it did,  the YTM could dramatically improve. With a rate this low there is an incentive to ride to maturity. Presumably, the desire to "repay" the restructuring and remove a living blot from its escutcheon would be a motive to refinance (when that was possible).  More importantly, it could alleviate cashflow demands, including the requirement to dismantle its expensively acquired empire of  "core" investments.  The unknown is when banker and investor ADD will kick in and permit a refinance.  A good guess is probably more than 3 years out, particularly as the upcoming US$30 billion of new maturities over the next 2 years will remind the apparently congenitally forgetful and heedless of the "hole".

BIS Releases Triennial Central Bank Survey on FX and OTC Derivatives Markets

The BIS released its Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market Activity.  Use the links at the upper right of the press release page to access the full report.  The links at the bottom of the page are to individual country reports released by individual country central banks.

Here are some headlines from the BIS press release.

1. Turnover on the Global foreign exchange market

• Global foreign exchange market turnover was 20% higher in April 2010 than in April  2007, with average daily turnover of $4.0 trillion compared to $3.3 trillion. 
• The increase was driven by the 48% growth in turnover of spot transactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.
• The increase in turnover of other foreign exchange instruments was more modest at 7%, with average daily turnover of $2.5 trillion in April 2010. Turnover in outright forwards and currency swaps grew strongly. Turnover in foreign exchange swaps was flat relative to the previous survey, while trading in currency options decreased.
• As regards counterparties, the higher global foreign exchange market turnover is associated with the increased trading activity of "other financial institutions" - a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others. Turnover by this category grew by 42%, increasing to $1.9 trillion in April 2010 from $1.3 trillion in April 2007. For the first time, activity of reporting dealers with other financial institutions surpassed inter-dealer transactions (ie transactions between reporting dealers).
• Foreign exchange market activity became more global, with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.
• The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.
• The relative ranking of foreign exchange trading centres has changed slightly from the previous survey. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

2. Turnover in OTC interest rate derivatives

• Activity in OTC interest rate derivatives grew by 24%, with average daily turnover of $2.1 trillion in April 2010. Almost all of the increase relative to the last survey was due to the growth of forward rate agreements (FRAs), which increased by 132% to reach $601 billion.

More detailed results on developments in the foreign exchange and OTC derivatives markets and comprehensive explanatory notes describing the coverage of and terms used to present the statistics are included in the separate statistical release of the data. Explanatory notes follow statistical tables.  The BIS plans to publish, in November 2010, the detailed results of the activity in April 2010 and of the positions at end June 2010 on FX instruments. A specific press release will also be published in November on the global OTC positions at end June 2010. In addition, special features will be devoted to the Survey in the December 2010 BIS Quarterly Review.

A Tale of Two Headlines: Arabic Knowledge at Wharton Jeff Silver Interview

Arabic Knowledge at the Wharton School of Business at the University of Pennsylvania recently published an article with Jeff Singer, CEO of Nasdaq Dubai.  They don't just teach finance at Penn, but market segmentation as well.

Here's a link to the Arabic version and the English version  Presumably the first is targeted at Arabs and the second at non Arab English language speakers.

The Arabic headline is "International investors are not looking to own most of the shares in the region".

The English "Now is the perfect time for exchange consolidation".

An insight into the assumed different focus of each group.

Wharton also publishes Knowledge@Wharton which befitting a great university like Penn often has  interesting articles.

Investcorp to De-List London GDRs

Today Investcorp announced on the Bahrain Stock Exchange that it intended to de-list its London GDRs citing as a reason:

In the period since the Secondary Listing of the GDRs, there have been significant changes in financial markets and the pattern of trading shares. The volume of GDRs traded on the London Stock Exchange over the last 12 months has been minimal and Investcorp does not believe it is cost effective to maintain the Standard Listing on the London Stock Exchange.

Zawya Dow Jones quoted an Investcorp spokesman who noted:

"While Investcorp continues to have a wide range of international shareholders, in changed market conditions the secondary GDR listing in London simply no longer adds value in terms of additional liquidity or research following," a spokesman for Investcorp told Zawya Dow Jones Thursday.

A review of the periodic reports of the Bahrain Stock Exchange reveal the following "extensive" trading in the shares of Investcorp on the BSE:

1. 2009 Annual Trading Bulletin:  For the entire year, there were just 2 transactions for 548 shares representing 0.069% of the outstanding shares of Investcorp.  (Investcorp has 800,000 outstanding shares of common stock). The total for both transactions  was BD307,529, roughly US$814,952. By contrast in 2008, a total of 1,431 shares (0.179% of outstanding common shares) were traded (30 transactions) for BD1,462,491 (US$3,875,601) and in 2007, a total of 5,905 shares (0.738% of common shares) (32 transactions) for a total of BD5,509,677 (US$14,600,644). 
2. 1Q10 Quarterly Trading Bulletin: 1 transaction for 550 shares in an amount of BD308,651, roughly US$817,925).
3. 2Q10 Quarterly Trading Bulletin:  No trades at all.
4. July 2010 Monthly Report (the latest on the BSE):  No trades.
5. To be clear none of the above constitute trading even 1% of  Investcorp's shares.  This pattern of light trading is to be crystal clear not just an issue with the shares of Investcorp but is pretty widespread on the BSE, which is why Investcorp devised its GDR program back in 2006.

So, I find it a bit hard to take this story at face value. Certainly Investcorp is not in dire financial straits and therefore does not need to cut expenses at the cost of reducing liquidity for its shareholders.  Is the problem one of the market price.  If the shares trade on the LSE more frequently, they may drift lower.  Liquidity can work two ways with stock prices.

Here's a link to the Investcorp GDR page at the LSE.

A few interesting other items:

In April this year, Investcorp announced it had signed a deal with two holders of Investcorp GDRs to buy them at US$5.00 per share.  In case you're wondering that's about US$0.24 over the offer price announced today, but then markets are down since April.  Interesting that having had a problem raising common equity not so long ago that Investcorp would be buying back common equity.  Wouldn't it make more sense to buy back expensive preferred stock?

If you recall, Investcorp has a special approval from the Central Bank of Bahrain to hold up to 40% of its outstanding shares as Treasury Shares.  And if not, it's outlined on page 28 in Investcorp's 2009 Audited Financials.  That is, just coincidentally, the free float on Investcorp's shares which you'll see outlined on the same page.

I wanted to check what level of Treasury Shares that Investcorp was holding but couldn't immediately find their Quarterly financial reports on their website.  Can anyone out there help me?

All in the Family?: Heavy Trading In Kuwait International Bank Shares - Who's Buying?

AlQabas reports that in the past 10 business days some 90.1 million shares of KIB (8.6%)  have been traded.  KD 19.5 million worth in 1121 contracts.  Apparently someone is buying because the share price  is rising.  2 fils yesterday on 7.5 million shares.  Compared to the KSE which is on a downward trend closing 17.7 points lower.

The speculation is that someone is accumulating a position.

The article does note the requirement for disclosure when one's position hits the 5% mark.  Though I suppose several of one's friends could buy just under the "wire".

Maybe Tessio, Clemenza, Fredo, Tom Hagen, etc.   One suspects not Barzini or Tattaglia.

What Were They Thinking?: Bharti Airtel US$7.5 Million Loan - "Sour" Skim

You'll recall that Bharti Airtel secured a US$7.5 billion loan last March to fund its purchase of African assets from Zain Kuwait.  Original pricing on this 4.7 average year life loan was 195 basis points with a 20 basis point up front fee.

Subsequent to granting of the loan, S&P reduced Bharti's credit rating from BBB- (investment grade) to BB+ (non investment grade).  It seems now that the lead arrangers have a bit of problem.  Their hoped for skim on the loan has gone sour.  Rather than being able to sell the loan at say 190 basis points margin, the lead arrangers are reportedly finding that the "market" is demanding around 250 basis points.  

I've seen comments that suggest the mark to market would be on the order of US$40 million to 42 million.  Without the exact amortization schedule, it's not practical to calculate.   BofA is reportedly going to mark.

Funny thing is, when the lead arrangers were pricing the deal, S&P put the Company on ratings watch for a possible downgrade.  One would have thought (at least this one) that perhaps the pricing would have been linked to the rating.  Apparently not.

The frenzy with which the loan was bid may be a leading indicator of the end of the banking recession and the return to "happy days".  Though the sour skim may be a contrary sign.

Lead Managers and their reported shares are:

1. Stan Chart US$1.3 billion
2. Barclays: US$0.9 billion
3. ANZ, BNP, BofA, Credit Agricole, DBS, Bank of Tokyo Mitsubishi, Sumitomo Mitsui:  US$0.8 billion.

(There's apparently a bit of rounding in the above numbers).

Global Investment House - Poor Performance of Funds Highlighted Why?

AlQabas has an interesting article on YTD performance through 25 June performance of funds domiciled in Bahrain.  Global has I believe some 12 or so funds listed on the BSE.

For the record, the results were:

1. European Stock Index Fund down 9.8%
2. US Stock Index Fund down 7.52%
3. Energy and Petrochemical Industries down 6.32%

Other firms similar negative performance is mentioned.  

1. SICO's Gulf Stocks Fund is down 6.53%
2. TAIB's Bank's MSCI-based GCC Stocks Fund (Islamic) down 5.77%.

Interesting article because of the focus on Global - and the performance of just three of its funds.  In an environment where other fund managers are incurring losses as well.  

DIFC Investments Downgraded with Outlook Negative

8 July 2010 - Approximately US$1.25 billion in debt affected

Moody's Investors Service has today downgraded to B3 from B2 the senior unsecured issuer and debt ratings of DIFC Investments LLC ("DIFCI" or "the Group") and Dubai Sukuk Centre Ltd. At the same time, Moody's has converted DIFCI's B3 issuer rating into a B3 corporate family rating (CFR) and assigned a probability of default rating (PDR) of B3, in line with the rating agency's practice for corporate issuers with non-investment-grade ratings. The outlook on all ratings is negative.

Moody's says that DIFCI's downgrade to B3 reflects the Group's highly leveraged financial profile, its expected heavy reliance on asset disposals in the coming 12-24 months in order to build sufficient liquidity to meet maturing debt obligations, and its continued negative free cash flow generation. While recognising management's intention to refocus the business, reduce costs and dispose of non-core assets, Moody's points out the risk that these measures may be insufficient to ensure that the Group has available funds to meet its maturing financial obligations as they become due over the next two to three years. The downgrade to B3 also factors in the negative impact that challenging conditions in the Dubai real estate market continue to have on DIFCI's financial profile. In 2009, the company recorded significant impairments in its real estate portfolio, which, combined with write-downs in its broader asset portfolio, contributed to a full-year loss from continuing operations of USD480 million. 

 More bad news for the Emirate.   And a commentary on market conditions. 

The Curious Case of UAE Banks

Roula Khalaf at the Financial Times:

What’s going on at the banks in the United Arab Emirates? It is an open secret that the deterioration in their asset quality is worse than suggested by the size of problem loans, which credit rating agency Moody’s puts at 4.9 per cent of total loans at the end of last year.

Some accounting magic keeps the amount of reported troubled credits lower than actual.  Renegotiation of troubled credits another way that numbers are managed.   More distress on the way in terms of the full knock-on effects of the crisis.  

But fundamental support for the banking system posited.

No doubt.  

But weakness in the banks will lead to lower loan growth.  Those loans granted will have stricter terms.  And thus there will be an economic price to pay.

Jones Lang LaSalle: "Dubai Real Estate Slowdown to Continue"

You've probably seen reports quoting Jones Lang LaSalle's prediction that half of Dubai's commercial office space will be vacant in 2011 and that the residential property market will also be under stress until then as well.

Well, here's the original JLL report that is the basis for those news items.  Besides containing more information, the JLL report also provides some nuances.

Commercial Office Real Estate

1. While there is a substantial vacancy rate in commercial office space currently at 38%,  only 12% of single ownership stock in the Central Business District ("CBD") is vacant.
2. JLL sees very little demand for "strata titled" space.
3. There is in some respects a shortage of good quality supply (location, specification, legal title) as evidenced by the lower vacancy rate in the CBD.

Residential Space

1. Rents for  higher end apartments (Burj Khalifa) continue to decrease significantly.
2. Higher end villas are hit even harder.

Retail Market Space

1. Estimated Rental Values down 39% from 2Q09 to 2Q10.
2. Retail sales growth expected to come from department stores and mid market value chains rather than luxury goods.
3. No significant new supply until 2013 (Mall of Arabia in Dubailand).

Hotels

1. Beach hotels have higher Average Daily Rates than business hotels - AED1,386 versus AED660.
2. New hotels are expected to intensify competition and lead to a decline in ADRs not a decline in occupancy percentages.

There's a lot more in the report and you can "mine" it according to your own interests.

Dubai Rentals - Bargain Time

What's interesting about this article is the assertion of a new found willingness by landlords to negotiate rents.

Apparently, tenants are taking advantage of the market to move from older to newer properties.  Or to properties that are more convenient.

As a result not only are the explicit rentals coming down, but landlords are offering incentives like free months, absorption of utilities, enhanced maintenance, etc.

A key factor going forward will be the balance of inward and outward migration by expatriates.  A negative trend will depress rates.  A positive one may lead to stability and some increases.  And the balance will have clear implications for property and development firms as well as their creditors.

According to Colliers estimate, average rental rates have declined by 25 per cent between Q2 2009 and Q1 2010. As per Harbor's calculations, International City rents are 20 per cent lower than Q4 2009 and eight per cent lower than Q1 2010; Discovery Gardens rents are 13 per cent lower than Q4 2009 and eight per cent lower than Q1 2010, while rents in Dubai Silicon Oasis are five per cent lower than Q4 2009, but remain stable compared to Q1 2010.

Robinson points to a one-bedroom apartment being leased in December 2009 in Discovery Gardens for Dh57,000, which came down to Dh50,000 in March 2010 and is available for Dh40,000 in May.

However, a studio apartment in International City, leased for Dh30,000 in December 2009, declined to Dh22,000 in March 2010 and is being still leased for the same rate.

"Dubai World Property Plan Not a Quick Fix" UBS

Copyright The Truth About

Creative Commons Attribution-Share Alike 2.0 Generic License

The National has an article with the above headline and this lead paragraph.

If you thought the troubles in Dubai’s property market would be cleared up overnight if Dubai World successfully restructured its debt, you may want to think again.

Wise words indeed.  

To which AA might add, that if you did, you might want to consider turning over your financial affairs to someone more reality based.  That being said, if you do execute a power of attorney, choose your "wakil" wisely. 

In which case the following word's from the Bahraini Newspaper AlBilad may offer some helpful guidance:   لا تدع زوج ابنتك يقود سيارة عائلتك

Ithmaar Bank Rights Issue - Only 52% Take Up

Ithmar Bank announced on the BSE that on 28 March it had held its Ordinary General Meeting of Shareholders.

Tucked in the announcement were the results of its recent Rights Offering. 

“The subscription period ended on Thursday, and we are pleased to report that the rights issue has raised $103 million,” said Ithmaar Bank Chief Executive Officer Mohamed Hussain.  “The Offering was an opportunity for current shareholders to further consolidate their stake in Ithmaar Bank – and the fact that it proved so successful is testimony to our shareholders’ unwavering faith in the Bank’s potential,” he said.

Sounds good.  What wasn't mentioned was that the Offering was for US$199.3 million.  That means a 52% take-up.  Not exactly a roaring success.

Ithmar was hampered by two things:

1. A US$235 million loss for Fiscal 2009.
2. The fact that Bahraini Companies Law does not allow a company to offer its shares for less than par value.  Ithmar's par value is US$0.25 per share.  It last traded at that level on 19 October 2009.  It currently trades at about US$0.19 per share.  A difficult sale indeed.

Ithmar had hoped to raise US$400 million to finance its conversion to a retail /commercial Islamic Bank from an investment bank.  The first leg has not gone so well.  

It's hard to imagine that a US$200 million or US$300 million (if they try to make up the reduced up take on the Rights Offering) mandatory convertible sukuk is going to fly off the shelves.  Unless, Deutsche has another client?

Kuwait National Portfolio - A Slightly Different Take From Bader Al-Subaie

A slightly different take on the purpose of the National Portfolio from Bader Nasser Al-Subaie, Chairman of Kuwait Investment Company which is managing a portfolio for the Government.  Here's the KUNA account in Arabic and English.

From his reading of the founding documents of the National Portfolio concept, the primary focus is investment and investment returns with impact on the market a desirable secondary effect.  Of course in "providing liquidity to the market" the National Portfolio does support the market.  And that there was an entire package of steps - of which only two have been implemented.

Earlier post here.

Kuwait National Portfolio Poised to Make Significant New Investments?

AlAnba'a Newspaper (Kuwait) reports that the Kuwait Investment Authority ("KIA") met with three Kuwaiti investment companies last week to hear their proposals for investing the remainder of the National Portfolio set up by the Government in 2008 to combat the effects of the global financial crisis on Kuwait's economy.  The NP was capitalized at KD1.5 billion, though only KD0.4 billion has been invested to date.  That has led to criticism from various parties for the need for greater speed, especially punters caught in the market downturn.  Not of course for concern for their own finances, but for the greater national self-interest, I am sure.

AlAnba'a reports that the NP earned 13% during 2009, a rather incredible return considering the overall KSE is down some 10% for the year. (More on this remarkable result below).  Furthermore the article notes that expectations are for a 30% return on the NP this year. 

For some reason, AlAnba'a expects that once a firm is chosen there will be a significant infusion of funds by the NP into the market - either all or a great portion of the remaining KD1.1 billion.  As you might guess from that comment, I have some doubts as to whether this can move forward in the next few days (" خلال الأيام القليلة المقبلة").  The Government still has to pick new managers for its portfolio and sign contracts with them.  Then funds have to be transferred.   Then one would expect a careful process of analysis and selection of stocks.    

According to the news article, the Government will apply the following criteria in selecting a new fund manager:  The firm should not have any financial weakness or be involved in any financial irregularities (an alternative translation would be crimes) and have good performance over the past five years. It's also "necessary" that it have a good reputation and possess both confidence (presumably in its abilities) and in its commitment.  That I suspect should quite smartly narrow down the list of potential new managers, though I suppose there could be local variants of some of these standards.  There is after all Australian Rules "footy".  And it works quite nicely I am told.

At the end of the article there is a precis of criticisms levied by the (Government) Audit Bureau ("ديوان المحاسبة") about the National Portfolio's performance in 2009.  The AB's report begins by listing a series of decrees by the Council of Ministers and the Finance Minister that the AB believes have not been implemented in the NP.  These have to do with maintaining conformity with certain ratios limiting the amount of the portfolio that can be invested in an industry or a single company within that industry.  What this means is that at least some the existing managers of the NP are running portfolios less diversified  than the Government regulations determined was appropriate.  The AB report also notes that the NP's goals also include improving the factors influencing trading on the KSE - to foster positive factors and eliminate negative ones.  And presumably there is a criticism implied here that the NP hasn't been doing enough in that area.

As a side note, it is a requirement of Kuwaiti law or regulations that when the Government owns 25% or more of a company that that company be subject to an audit by the Audit Bureau.  There have been some complaints raised that there are listed firms in which the Government has broken this threshhold but which have not been made subject to an AB audit.  And if you've been following the matter, some investors have raised a formal complaint with the KSE.  It is an old but wise truism to be careful what you wish for.